Why a bank is like Lebara Mobile

This year's MWC Mobile Money Transfer seminars were interesting, as usual. But the really interesting thing is what nobody said; there was a lot of talk about what you might call the transport layer, the long-haul section in the middle of the transaction, but surprisingly little about the user interface - the point at which the eventual customer pays money into the system or takes it out.

That's especially odd, as the participants were all very keen to point out that they realised the vital importance of getting cash in and out. Cash is, in a sense, the killer application here; using mobile credit transfer for direct payments, sexy though it is, requires you to beat a powerful negative network effect. It's the first fax problem; it's useless until other people accept it, but there's no reason for them to accept it until people start using it. But if you can convert this funny invisible stuff into cash immediately and without paying usurious commissions, there's no reason not to accept it - because it's as good as cash.

Further, many of the use cases for mobile money transfer are all about getting around the security problems of transporting cash. Take Afghan GSM operator Roshan; they recently licensed Safaricom's hugely successful M-PESA system, and one of the first applications for it is paying the Afghan army.

You may recall that there was a steady stream of horrible massacres in Iraq which occurred precisely because there was no way of sending money from whichever corner of the country you were stationed in to your family, so Iraqi soldiers and police would travel in numbers by bus to deliver the cash in person. In a country full of insurgents, terrorists, and just old-fashioned highway robbers, this was an invitation to disaster. So, now, the Afghan army gets paid by M-PESA transfer, and they can send money on the same way.

This is a transport-layer problem, granted, but its solution is based in the user interface. Without the user interface - both the technical one of the application on the handset, and the commercial one of Roshan's network of trusted airtime-selling agents who actually handle the cash - the GSM transport layer would be useless. Among other things, the fact that the recipient simply collects a cash transfer from their local agent means it's not immediately obvious they are receiving money from the government, which could be a security problem in itself.

So, the ability to readily convert credit into cash is vital to get user and merchant adoption. Further, the ability to do the opposite is crucial to the success of mobile payment systems as businesses - they are the kind of two-sided businesses that make their money from transaction fees, and are therefore dependent on volume. Also, a significant chunk (15% on Orange's West African systems) of the revenue for the telco comes from interest on the balances held with the banks. And a significant motivation for the banks to get on board is that it's a source of deposits and hence capital, and also a driver of activity for their foreign exchange desk. But in the end, it all comes down to the user interface.

So far, interestingly enough, all the successful commercial deployments have recognised this. None of them have found it necessary to recruit third party service providers to handle the middle of the trip, although several have partnered with banks in order to deal with regulatory issues and the complexities of the business. What turns out to be crucial?

  1. The network of trusted agents collecting and paying out cash
  2. User experience - clients and terms of business
  3. Price and low marginal cost

After all, these things have always been true of finance; who knows or cares, outside the trade, about how SWIFT or BACS actually work? What matters is the performance of your local bank branch, the creditworthiness of the business as a whole, and the efficient performance of transactions. And, of course, banks don't hold all your money in cash in a safe - imagine a bank branch that takes in roughly as much cash as it pays out. It doesn't actually need to transfer very much cash - as long as the flows are roughly in balance, it's all book-keeping transactions. (Think of it as rather like P4P.)

Of course, in the past a whole system of unofficial international remittances grew up that was entirely without a formal transport layer - we're talking about the Islamic hawala here, where agents accept cash for transfer from the sender, and put the recipient in touch with their partner, who pays out the money. Only if there is a net imbalance which one of the agents can't fund locally do the agents need to actually transfer funds; the rest relies on trust and reputation. There's a risk that the agent will make off with the funds, but then, this is true of all financial systems.

So, the upshot is that telcos who are interested in mobile payments (which should be "all of them") shouldn't sweat the detail of international transfers, and should be sceptical of the claims of potential partners in this field. Instead, concentrate on the user experience, the agent network, and operational efficiency. As an example, think of Lebara Mobile, the migrant-focused MVNO that operates in Europe and especially around the Mediterranean. It's an MVNO - it doesn't own the transport layer. But its success is founded on building a trusted name and a trusted network of agents on both sides of the Mediterranean, in both the source and destination countries.

And, given that it deals with different network partners in each country and provides roaming, it's already transferring money between those countries - if someone buys airtime credits in Morocco and uses them in Spain, this is a cash transfer to the Spanish wholesale operator. How long before they go into the money transfer business?